TODAY’S STUDY: LESSONS FROM THE NEW EV MARKETPLACE

Here’s something important to remember, as the first mass-market battery-powered cars roll from Chevrolet and Nissan showrooms onto the world’s streets: The first gas-powered cars were disdained as dangerous and disruptive to horse-drawn traffic. Car enthusiasts bought special protective overcoats, hats and goggles. Vociferous opponents saw them as impractical toys for cranks and the rich and called for bans. Yet somehow the automobile prospered.

Range anxiety, the concern potential electric car buyers have about being able to keep their batteries charged along their way, seems trivial by comparison.

Oil is again at a hundred dollars a barrel and rising. The present Middle East and North Africa (MENA) disorder promises only uncertainty as far as even the most astute eye can see. Beyond that foreseeable horizon lie substantial peak oil and climate change worries. The Big Money is betting, therefore, that electric-powered vehicles will follow the same road as gas vehicles from something frighteningly newfangled to the neighborhood norm.

The report highlighted below describes the lessons already learned and the lessons yet to be learned on the plug-in vehicle’s road not yet traveled.

Changing the game; Plug-in electric vehicle pilots
February 2011 (Accenture)

Executive Summary

Transport accounts for close to 60 percent of global oil consumption and an estimated 30 percent of global carbon emissions.1 With oil demand projected to grow by 1 percent per year on average from now to 2030—reaching 105.2 million barrels per day in 2030—and the transport sector being the main driver of this growth (accounting for 97 percent2), the industry is facing mounting pressure to find alternative fuel options and limit the carbon impact of growth. It is within this context that plug-in electric vehicles (PEVs), estimated to be 40 to 65 percent3 more efficient than conventional vehicles, have received significant attention, and a number of governments have set ambitious targets for their adoption.

Our previous Accenture report published in November 2009, “Betting on Science: Disruptive Technologies in Transport Fuels,”4 examined 12 potentially disruptive transport fuel technologies, 10 markets and 25 companies trying to bring these technologies to market. Among these technologies, we described PEVs—including plug-in hybrid electric vehicles (PHEVs) and all electric vehicles (EVs)—leading to the electrification of transport as the industry “game changer,” due to its potential to completely disrupt the transport industry, open up the industry to three new industries (battery, utility and charging) and change consumer interaction with the vehicle.

Moreover, this potential is being fed by increasing attention from governments across the world. Since the publication of Betting on Science, this attention has only strengthened as billions of dollars continue to be invested into the nascent industry to test the technologies through pilots, and to implement subsidies with the aim of kick-starting the market (and overcoming the famous “chicken-and-egg” conundrum—who invests first, industry or consumers?) and scaling up the electrification of transport.

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However, despite this investment, the complexity and novelty of the electrification value chain (see Figure 1)—which merges the utility value chain with the automotive, the battery and charging infrastructure value chains—suggest a number of challenges as to how cost-effective business models will be defined and how electrification of the transport industry will be successfully delivered.

We discussed many of these challenges in Betting on Science, but as the market evolves, a number of other additional obstacles to address are coming to the foreground. Figure 2 highlights these additional items, which if not addressed, could challenge delivery of electrification of transport.

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Challenges to address

Market models and commercial and regulatory frameworks

• Determination of roles and responsibilities across the value chain to develop profitable business models with clarity between the various players.

• Development of commercial frameworks to support these business models.

• Identification of how PEVs fits into the utilities’ regulated industry structure.

• Identification of deployment models for PEV infrastructure.

Standardization and interoperability • Development of standards across charging infrastructure, connectivity to the electricity network, and cyber security and communications security, to ensure interoperability within and across markets, providing customers with security, ease and flexibility.

• Development of infrastructure payment standards enabling flexible alignment of costs and payment potentially to be included in a customer’s utility bill.

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Core PEV technologies

• Development of battery and engine technologies to ensure cost-effective and robust solutions. Batteries account for the large majority of the cost of PEVs, and until the cost per kilowatt-hour (kWh) dramatically decreases (to reach approximately $300/kWh), consumer uptake is likely to be limited to a dedicated and niche consumer market segment.

• Specification of charging infrastructure to meet health and safety standards, usage requirements (e.g., installing fast-charging stations where there is not sufficient grid capacity to support the voltage is evidently not feasible), and consumer needs (i.e., location of infrastructure will be critical to determining usage and payback period).

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PEV technology enablers

• Development of PEV managed services and fit-for-purpose communication interfaces between the supplier and the charging point, the charging point and the vehicle (and/or the consumer) and the vehicle and the supplier.

• Development of back-office support functions, including IT solutions and services, to conduct the various commercial and operational transaction requirements to operate the PEV market on an industrialized and commercial scale (including, for example, the development of software to handle and settle roaming transactions between providers).

• Identification of support services required for maintenance of technologies and market structures.

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Grid impact

• Detailed investigation into the impact of PEVs. There are a number of studies which have measured this impact at a theoretical level, identifying that high scale adoption of PEVs could have a substantial impact on the grid if charging is not managed or controlled; however, understanding the real impact on the grid by country is still required.

• Definition of a practical approach to grid impact.

Consumer behavior

• Understanding of consumer preferences and behaviors to develop fit-for-purpose PEVs, which cater to consumer requirements and take into account likely trade-offs consumers will be willing to make, if any.

• Education of consumers to ensure better understanding of the functionality of PEVs, availability of charging and their positive environmental impact.

While these challenges may seem like significant barriers to PEV market penetration given the range of required considerations, the number of stakeholders they involve and the extensive research still required, the technologies behind PEVs continue to improve.

The key to these improvements are pilot projects which provide stakeholders with a safe space in which to develop capabilities, test these technologies and devise a number of creative mechanisms to address these items. As a result, these pilots are integral to determining market scale-up of PEV penetration, business models going forward and “who’s who” in the emerging market.

This study aims to highlight the capabilities being developed through PEV pilots, investigate some of the early lessons learned, the creative mechanisms in development and the emerging business models (with a particular emphasis on charging business models) across geographic markets through the lens of these pilot programs. While reading this paper, it is important to remember that electrification remains a nascent industry and that it is constantly evolving. Continuous monitoring of the market will thus be critical to gaining clarity and to identifying the market winners.

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While many of our conclusions are applicable to all PEVs, our focus has been on assessing EV pilots versus PHEV pilots. This focus is because our previous studies, Betting on Science and Biofuels Time of Transition:Achieving High Performance in a World of Increasing Fuel Diversity,5 had a strong focus on PHEVs. In addition, EVs have more significant business model implications due to the required changes in consumer behavior and to the extensive potential strain on the grid. The study highlights five primary conclusions:

• Capabilities required to deliver electrification of transport will be the same across markets, but the players that choose to develop these capabilities will vary by geographic market, resulting in the development of a number of market models (with their own regulatory policies) across the globe.

• Early lessons learned from PEV pilots identify that many of the assumed challenges can be overcome through testing and market awareness, but three key challenges require further time for development: cost, scale and grid management. For example, PEVs are likely to meet the daily driving requirements of the average city user and therefore the infamous “range anxiety” is perhaps not the primary barrier to consumer adoption, but testing of core PEV technologies (and their impact) is limited by low penetration rates and will need continuous monitoring as the electrification of transport market scales.

• Creative mechanisms are being devised to overcome key challenges related to technology cost, scale and grid management such as the disaggregation of the battery cost from vehicle ownership.

• A variety of business models are emerging across the three value chains: automotive, battery and charging, with different players taking the lead in different markets. Early success of these business models will determine “who’s who” on the electrification of transport landscape.

• The consumer challenge is one that remains pertinent, with market uptake difficult to estimate. Better understanding the consumer and who will buy PEVs will be critical to anticipating scale and the success of electrification of transport.

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Emerging business models

The variety of pilots and the number of stakeholders involved highlights the emergence of different business models from the three merging value chains—automotive, battery and charging infrastructure.

In automotive, electrification of transport is forcing auto manufacturers to expand their supply chains and develop key strategic relationships with battery manufacturers, as batteries are the heart of the vehicle. These strategic partnerships are critical to decisions as they relate directly to the chemistry of the battery (resulting in automotive manufacturers favoring one technology over the other and taking us back to the PHEV/EV debate, see “In focus: Chevrolet Volt and the Nissan LEAF” on page 12) and the associated cost, impacting the go-tomarket model. Two primary models are emerging today:

• Direct vehicle sale to the consumer, indicating the relationship between consumer and automotive manufacturer does not change drastically, and the automotive manufacturer relies on vendors to sell the vehicle to the consumer as done with conventional vehicles. This model indicates a high vehicle purchase price and is thus likely to only appeal to those green consumers who can afford it. It further strengthens the focus on the warranty of the battery as the expected lifetime of the vehicle is today less than a conventional vehicle (eight years quoted by GM and Nissan versus the typical 10 to 15 years for a conventional vehicle).

• Leasing of vehicle, indicating a change in the way a consumer purchases a vehicle but rendering PEVs more affordable. Indeed, this model avoids the high up-front purchase price by spreading it out over a determined period of time. Both GM and Nissan are offering this as a payment option for the Volt and the LEAF, enabling consumers to spread the cost out over 36 months. BMW has followed a similar approach in its pilots (although given the pilot conditions, consumers do not lease the vehicles for a sufficient period of time to own the vehicle at the end of the lease), leasing the MINI E to consumers for a period of 12 months.16 Emerging business models around the battery also are interesting. Widely recognized is the fact that the battery pack accounts for the highest proportion of cost in a PEV. This high cost is often quoted as a barrier to consumer adoption and to the scale-up of PEVs. Industry stakeholders, however, are not letting this defeat them, and are instead developing creative business models around the battery to lower the cost and make the PEV more affordable. The key model of note here is:

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• Battery leasing, indicating a change in the way a consumer purchases a vehicle by disaggregating the cost of the battery, making the vehicle more affordable, and by rendering the issue of battery warranty a negligible point to consumers. This is the Better Place business model, as Better Place is maintaining ownership of the batteries and leasing them through a subscription service model (which also enables consumers to have access to Better Place’s charging infrastructure) and selling the consumer “miles” versus electricity.

Charging infrastructure is a final area which deserves attention. Here, again, cost and scale are key issues as the infrastructure is expensive and consumer demand still uncertain, raising challenges of how many charging posts to install and where to install them. This strengthens the importance of pilots in identifying how often consumers will charge their vehicles, when and where. From the case studies detailed in this paper, three key business models to manage charging infrastructure are emerging:

• The public infrastructure model, which focuses on providing charging infrastructure for the public space and particularly tries to bridge a gap for those consumers who do not have access to home charging.

• The private infrastructure model, which responds directly to consumer demand as opposed to anticipating it, and focuses on installing charging stations in homes or at private sites (e.g., office parking lots and shopping malls) to ensure higher usage and gain greater return on investment.

• The end-to-end solution, which provides a full solution to consumers, combining charging with battery/vehicle maintenance and value-add consumer services to minimize the number of interfaces the consumer has to manage and therefore simplify the solution.

These emerging business models across the value chains will continue to develop as pilots accumulate more lessons, consumer interest increases and the market scales. This makes the market and evolving landscape ever more interesting to watch as some of these business models (and the players supporting them) will prove successful in attracting cale and profit, while others will have to bow out of the electrification market. Watching these pilots provides interesting indicators for what roles different companies and organizations will play.

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Conclusion

PEVs have received increasing amounts of attention from policymakers, business and the media. This attention also has put a lot of pressure on the technology to deliver, as governments have set ambitious targets and huge levels of investment have been poured into the development of pilots to test the various technologies and the supporting business models, to bring PEVs to life.

Nonetheless, pilots provide an interesting bed of research to investigate, enabling several conclusions to be made with regard to market progress and emerging business models, and therefore have been the focus of this study. As previously mentioned, we have focused on pure EV pilots, as the implications of EVs over PHEVs are expected to be more significant—both in terms of consumer behavior and the impact on the grid.
Nevertheless, the conclusions drawn are largely applicable to all PEVs. The pilots highlighted here are interesting for several reasons:

• They are being supported by a wide variety of industry players, including utilities, municipalities, oil companies and new market entrants.

• They are testing a variety of factors, including customer preferences, core and enabling PEV technologies and the requirements for infrastructure.

• They are testing the viability of different business models across value chains, automotive, battery and charging infrastructure. However, it is important to note that these highlighted pilots are only a sample of pilots being run across the globe. Our focus has been to identify those pilots that are testing core PEV capabilities and technologies. Thus, the pilots here are less focused on additional grid opportunities, such as distributed storage or vehicle-to-grid technologies. The exception here is the focus on the integration of renewables, with Showa Shell assessing the ability to integrate renewables into charging. We expect these grid related opportunities to become more significant as the market evolves. Through assessment of these pilots we have highlighted, we have made five key conclusions:

1. PEV market models will vary by geography.

Capabilities required to deliver electrification of transport will be the same across markets, but the players that choose to develop these capabilities will vary by geographic market, resulting in the development of a number of market models (each with their own regulatory policies) around the globe. The evolution of different market models is natural, but needs to be carefully managed and international cooperation strongly pursued.

This is particularly true given that standardization on a regional if not international level is important in supporting scale-up of PEVs.

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2. Many of the assumed PEV challenges can be identified through pilot testing, but three key challenges require further time for development.

While there are still many lessons to be learned, the early results from the pilots indicate that the technology works. However, three key challenges remain.

Cost
The technology is still too expensive for consumers to purchase vehicles at scale and for a return on infrastructure investment to be made.

Scale
While the technologies function in an isolated environment, there are too few PEVs on the road to robustly test the technologies.

Control
Managed charging will be fundamental to protecting the grid and to permit managed charging, consumers will need to be incentivized to plug in to the grid whenever parked.

3. Creative mechanisms will be critical to overcoming key challenges related to technology cost, scale and grid management.

Industry players need to be proactive about market developments to stimulate demand and be creative in the mechanisms that they develop to support mass commercialization of PEVs—this end goal will then further help to overcome the barriers previously identified. For example, consumer uptake will be limited by the current cost of PEVs, at a significant premium to conventional vehicles, but if the cost of the PEV is spread out over the vehicle’s lifetime, higher consumer uptake is likely.

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4. A variety of business models are emerging across the three value chains—automotive, battery and charging—with different players taking the lead in different markets and working to resolve the challenges presented by PEVs. Early success of these business models will determine who’s who on the PEVs landscape.

As an example, the charging infrastructure business models identified in this study—the public infrastructure business model, the private infrastructure business model and the end-to-end solution—will continue to develop and will work to resolve these challenges in slightly different ways. The public infrastructure business model primarily seeks to resolve the issue of scale by providing market reassurance of support for PEV owners; the intent is to act as a market starter to support commercial models going forward. The private infrastructure business model is focused on cost and control and seeks to identify the appropriate balance between affordable prices for customers, convenience and minimal capital expenditure and impact on the grid. In this model, consumers would need to accept a cost premium and focus is likely to be on managed charging. Finally, the end- to-end solution seeks to resolve all three by disaggregating the cost of the battery from the initial purchase price, but by recouping the investment through a longer-term contract and additional support services; for example, in vehicle services, access to charging network, battery leasing and battery switching for range extension. Furthermore, the model looks to managed charging to reduce the impact on the grid and ensure a more
predictable load.

The number of players involved in the market at this early stage is overwhelming. As the market evolves, so will the players in this space. Currently municipalities, oil companies, utilities, automotive companies and new market entrants (from start-ups to companies such as Google, which are diversifying) are all assessing the viability of their business models. While markets are likely to have a mixture of solutions, and players, there will be clear winners by market. In the short term, public infrastructure business models will be an essential part of the landscape to support market scaling, but longer term, PEVs will need to become a profitable commercial model to be sustainable. The automotive business models, the private infrastructure business models and end-to-end solutions are likely to be the most interesting ones to watch.

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5. The likelihood of consumer uptake remains difficult to estimate.

Determining the success of these models is, in large part, the consumer. This is one area that we did not explore as deeply in this study, and it has surprised us that, aside from the BMW pilots, few lessons learned to date have emerged regarding the consumer and who will actually buy PEVs. Therefore, it is an area that requires a greater degree of attention, as the consumer remains at the heart of the debate, and will truly determine how fast PEVs scale in the commercial domain. The pilots and studies focusing on the latter will be particularly interesting to watch.